The repository of one hard-boiled egg from the south suburbs of Milwaukee, Wisconsin (and the occassional guest-blogger). The ramblings within may or may not offend, shock and awe you, but they are what I (or my guest-bloggers) think.

Social Security’s future, at least in the form it has existed dating back to FDR, is now greatly imperiled. The last few years of legislative neglect — due to a failure of national policy leadership coming just as the baby boomers have begun to retire — have drastically harmed the program’s future financial prospects. Individuals now planning their financial futures, whether as taxpayers or as beneficiaries, should be pricing in a substantial risk that the federal government will not be able to maintain Social Security as a self-financing, stand-alone program over the long term. If Social Security financing corrections are not enacted in 2013, or at the very latest by 2015, it becomes fairly likely that they will not be enacted at all.

Blahous gave three reasons for a lack of hope for resolving the Social Security crisis – the Baby Boomers starting to retire, the inability of either side to compromise in the face of a lack of one-party domination, and the lack of seriousness of many in power to address the issue. Allow me to add a fourth – the inability to even address the Disability Insurance (DI) portion. Despite outgo in the DI program outstripping taxes since the end of 2005, outgo outstripping both taxes and interest on the trust fund since early 2009, and predictions in each of the last several Trustees’ Reports that the trust fund would zero out sometime this decade (with the 2012 Trustees’ Report putting that year as 2016), nothing has been done to address this. Even the assumed “solution” of chaining it to the larger Old-Age and Survivors Insurance (OASI) trust fund, which would extend the life of DI roughly 17 years at the cost of shortening the life of OASI roughly 2 years, has not made it to the floor of either House of Congress.

The overall problem is much worse, if not quite as immediate, as the 1983 OASI crisis, or the 1994 DI crisis. In 1983, OASI merely had to weather a short-term storm before running nearly 30 years of surpluses, though it would have collapsed again in the 2020s and, if tethered to DI, collapsed the entire system by 2040. In 1994, the fix for the drain of the DI fund was even simpler because it was merely a short-term fix designed to last 22 years – reallocate a larger portion of the FICA/SECA tax toward DI, possible because the larger OASI fund was projected to run a couple decades of surpluses with or without the reallocation. Now, both programs are in the red, and indeed, about to be deeper in the hole than projected in the mid-1980s as this graph on the projected balances from the 1982 and 2012 Trustees’ Reports from Blahous illustrates:

In 1983, the long-term solutions, which barely made it through Congress, were to delay the COLA adjustment by 6 months, bring federal employees into the system, subject the self-employed to the same total tax rate as “traditional” employees and employers, and subject half (the employer-funded portion) the benefits of the “wealthy” to the income tax (which, thanks to a lack of any adjustment for inflation, is hitting more seniors every year). Blahous notes that the divide now is at least twice as wide as it was then.

Worse, two of the main “solutions” often offered up by those on either side of the “limit benefits vs. tax more” divide, limit benefit growth to price inflation instead of wage inflation for at least the “high-income” earners, and raise the cap on the FICA/SECA tax to an undetermined maximum (up to and including infinity) without allowing any increased benefits, appear to be unable to solve the long-term problem on their own. Indeed, while either of the two most-extreme versions of the “solutions”, indexing all benefits to price inflation and eliminating the cap on the FICA/SECA tax entirely, may have passed the “75-year actuary test” back in 2005, neither alone will work in 2012.

What does continuing to do nothing until it is too late mean for Social Security? Blahous explains:

Upon merging into the general fund, Social Security benefits would be far less secure going forward. Benefit payments would have to compete with other annual spending priorities, and would be limited to those deemed affordable given pressures elsewhere in the budget. They would thus be much more susceptible to sudden reductions, means-tests, and other episodic changes to which general fund financed programs have long been subjected.

If this all happens, and renders tomorrow’s Social Security benefits less secure than today’s, it would be a tragic irony: the outcome would have been brought about largely by supporters of Social Security having countenanced the tactics of delay to the point that the program’s unique political protections could no longer be preserved. Those who care about the Social Security program need to clearly understand the consequence of this ongoing neglect; that time for a realistic financing solution has nearly run out.

Just as a reminder, when the trust funds run out of money, whether it be the DI fund in 2016 should nothing be done, the OASI fund in 2035 should nothing be done, or the combined OASDI funds in 2033 should that combining be the only thing done, the benefits paid out by said fund(s) will be cut by over 20%.

There is also the very real cost of getting DI to the middle of 2016, and OASI barely into 2035 (or if one prefers, the combined programs into 2033); the monetization of the trust funds. The Trustees put the difference between non-trust-fund revenues and expenditures of the combined OASDI programs at $4.993 trillion in current dollars (inflation-adjusted $3.506 trillion in 2012 dollars) through 2032, the last full year of “normal” operations. In 2032, the inflation-adjusted shortfall is projected to be roughly $349 billion in 2012 dollars (non-adjusted $586 trillion), or nearly a third of all the discetionary spending by the federal government this fiscal year, with an ever-increasing shortfall in succeeding years. Unfortunately, that money doesn’t exist outside of a series of IOUs, which means it will have to be borrowed, taxes will have to be increased, other spending will have to be cut, or some combination of the three will need to be done.

Before that, specifically in 2026, total spending on Social Security on an inflation-adjusted basis will exceed what will be spent in federal discretionary outlays this fiscal year. If all that is done is Social Security remains a drag on the larger federal budget by paying out all of the promised benefits, by the time 2070 rolls around and most of the Gen-Xers (including me) die off, in inflation-adjusted terms, spending on Social Security will be more than what either the White House Office of Management and Budget or the Congressional Budget Office expects the federal government to take in next fiscal year, when Taxmageddon hits.

Social Security, in its current form, is doomed. Waiting until the last few months, as was done in both 1983 and 1994, is not exactly an option. The window for an “easy” solution, if it hasn’t already closed, is rapidly closing. The person who is in the White House after January 19, 2013, and those in Congress next year, will have to make hard choices quickly.

Except for the “double-taxation” (both quarterly estimated income tax and taxation of benefits) months of January and June, the Old-Age and Survivors Insurance program has not had a monthly positive primary (cash) balance since July 2009.

The 12-month OASI primary deficit peaked at $20.16 billion in the June 2010-May 2011 period, and isn’t expected to ever become a surplus again by the Social Security Trustees, the Congressional Budget Office, or me. My re-estimation of the 2009 Trustees’ intermediate-case scenario, the last one I have any confidence in, has that never dropping below $10.6 billion (in the February 2012-January 2013 period).

The last time the Disability Insurance program had a monthly primary surplus, and indeed, the last time it likely will ever have a monthly primary surplus, was April 2009. If it weren’t for the temporary ability to monetize the DI “Trust Fund”, in most months, less than 75% of the scheduled benefits would be able to be paid out as its annual primary deficit has crossed the $34 billion level on annual costs of just over $131 billion.

Speaking of the DI “Trust Fund”, its book value has dropped below $165 billion, and even with interest paid, its annual “burn rate” has crossed the $25 billion level. That makes it likely the person who serves the next Presidential term will have to deal with an exhausted DI “Trust Fund”.

Ponzi Scheme?

First things first; since it is written as law, Social Security cannot meet the illegality portion of the definition of a Ponzi scheme. Of course, if what Charles Ponzi did was written into law as being lawful, it wouldn’t meet the illegality portion of the definition either.

While a full collapse of a Ponzi scheme is almost always the end result of the process, the point where it collapses with the promoter still around is when that promoter is unable to return what he or she promised to the “investors”. Because it is a compulsory government entity, Social Security will always be taking a lot of money and paying “something” in benefits unless a majority of Congress has the gumption to call “Bravo Sierra” on the wealth-transfer scheme and pull the plug.

It matters not a whit that Social Security is a defined-benefit plan rather than a defined-contribution one. Actually, that’s not quite true; the fact that Social Security is a defined-benefit plan means that when it becomes unable to meet the payments promised, or when the terms are altered for those already in the system (I’ll be generous and say “heavily” invested in the system to cover only those who are at least 55 years old), it also meets the “inability to meet returns” definition of a Ponzi scheme regardless of whether it continues to pay benefits.

As current law stands, the only sources of funding for both the DI and OASI programs are the payroll taxes (supplemented this year by transfers from the general fund to replace the temporary cut in the payroll tax), the taxes on benefits (really, just a recapture of money that has the effect of reducing net benefits and net cost) and the “Trust Funds”. Once the “Trust Funds” run out of money, or the SSA is unable to monetize them, the net benefits paid out in a particular month are limited to whatever comes in via the payroll tax (or more-properly, what is projected to come in via the payroll tax, less any interest due the Treasury on that particular “float”) that month.

That’s where the primary deficits loom large. For 21 of the last 25 months, the OASI program needed additional funding from the monetization of the “Trust Fund” to fully-pay its scheduled benefits, while the DI program needed additional funding from the monetization of its “Trust Fund” for the last 28 months and all but 22 of the last 97 months since its latest (and probably last) dip into the red began in August 2003.

“I’ve been on the unsecured creditor side of a customer going bankrupt,” he said. “If you come to me as an unsecured creditor in a bankruptcy situation where the customer is going through a reorganization and you say, ‘Secured creditors are getting dollar for dollar — that’s interest on the debt, that’s Social Security. The rest of you guys, until we get this figured out, will basically get 60 cents on the dollar. Once we go through the reorganization, once we get this figured out, you’ll probably get 98 cents on the dollar.’ I’d be going, ‘That’s a sweet deal.’ I’d do that in an instant.”

That is not to say, however, that Social Security is a sacred cow. After all, assuming the Trustees’ intermediate-case scenario isn’t too rosy, in order to get the “Trust Funds” to their exhaustion dates of 2018 for the Disability Insurance fund and 2038 for the Old-Age and Survivors Insurance fund, the Treasury Department will need to come up with roughly $7 trillion in cash it doesn’t have.

March 17, 2011

Senate Majority Leader Harry Reid (D-NV) said that he won’t take a look at making Social Security solvent for at least 20 years. Ed has already done a fine job knocking holes in that statement, but I have a couple of wrecking balls to deliver as well. I’ll let Ed handle the set-up:

Why take action now, if the “solvency” of Social Security won’t be at issue until 2037? In the first place, that’s debatable in and of itself. The SSA has slipped into red ink on a monthly basis six years earlier than projected by Peter Orszag in 2008, when he ran the Congressional Budget Office, which means that the extended projections are certainly questionable. The “fund” has no cash on hand, either; it consists of Treasuries that SSA received so Congress could spend the money over the last few decades. When SSA starts cashing those Treasuries, as it has to do now to cover monthly deficits, the federal government has to sell more bonds to cover the cost.

Since Ed quotes extensively Charles Blahous, author of Social Security: The Unfinished Work, and Blahous used the 2009 Trustees Report for the basis of his book, I’ll use that as well. In combined terms, between 2011 and 2030, using the intermediate case scenario, the combined OASDI trust funds will spend $3,482 billion (or if you prefer, $3.48 trillion) more than they take in. Through 2036, the last full year of “solvency” for the combined funds, that figure jumps to $7,167 billion. As Ed notes, that’s money the Treasury will have to borrow, or at least try to borrow.

The bad news is the actuaries that put together that report “sort of” missed on the near-term predictions. Instead of the combined trust funds running a $37 billion cash surplus between 2009 and 2010, they ran a $45 billion cash deficit. If one adjusts the future predictions to reflect the past 2 years of poor performance, the “drop dead” date drops to 2029.

The ugly news is that there is no combined OASDI trust fund. The two parts of Social Security, the Old-Age and Survivors Insurance and Disability Insurance, are two separate entities, and the smaller Disability Insurance fund will reach exhaustion before the end of this decade. At that point, those on federal disability will be taking a significant cut in benefits, on the order of 15%-25%, because neither of the programs are currently authorized to borrow to meet costs.

January 12, 2011

I know, it’s been too long since I did a wrap-up of the Social Security “Trust Funds”. However, we have final numbers from the Social Security Office of the Chief Actuary through November, and preliminary numbers from the Treasury Department for December, so it’s high time to do this.

Both the Disability Insurance (DI) “Trust Fund” and the Old-Age and Survivors (OASI) “Trust Fund” lost money on a primary (cash) basis in 2010. The OASI fund had a $15.9 billion primary deficit on $569.0 billion in tax revenue and $585.0 billion in total expenses, while the DI fund had a $32.9 billion primary deficit on $94.7 billion in tax revenue and $127.7 billion in expenses (note; the numbers will appear to be off due to rounding). Of note, before the Social Security Trustees admitted that the OASI fund would run a primary deficit in the 2010 Trustees Report, they did not anticipate in their “intermediate” estimations that it would run a primary deficit this early in any Trustees Report from at least 1997 onwards.

Once one adds in the $108.2 billion in interest “earned” by the OASI fund and the $9.3 billion in interest “earned” by the DI fund, the OASI fund had an increase in theoretical value to $2,429.1 billion (or $92.3 billion), while the DI fund had a decrease in theoretical value to $179.9 billion (or $23.66 billion).

How does that compare to the “intermediate” estimations in the last two Trustees Reports? In 2009, the Trustees estimated that the OASI fund would see a primary surplus of $42.1 billion and a fund value increase of $152.7 billion (to $2,502.2 billion from an estimated $2,349.6 billion in 2009 and an actual $2,202.9 billion in 2008) on taxes of $623.3 billion, interest of $110.6 billion, and total expenses of $581.2 billion. In 2010, that estimate changed to a primary deficit of $8.9 billion and a fund value increase of $99.9 billion (to $2,436.7 billion from an actual $2,336.8 billion in 2009) on taxes of $577.3 billion, interest of $108.9 billion, and total expenses of $586.2 billion.

For the DI fund, the Trustees estimated in 2009 that it would see a primary deficit of $23.7 billion and a fund value decrease of $14.3 billion (to $191.7 billion from an estimated $206.0 billion in 2009 and an actual $215.8 billion in 2008) on taxes of $104.4 billion, interest of $9.5 billion, and total expenses of $128.1 billion. In 2010, that estimate changed to a primary deficit of $32.4 billion and a fund value decrese of $23.2 billion (to $180.3 billion from an actual $203.5 billion in 2009) on taxes of $96.0 billion, interest of $9.3 billion, and expenses of $128.4 billion.

While costs have gone up a bit faster than expected, the primary driver of the earlier/faster collapse of Social Security has been the collapse of tax revenues, specifically payroll taxes, in the second year of the full-on POR (Pelosi-Reid-Obama) Economy. Since the full calendar-year 2010 numbers are not available from the Social Security Office of the Chief Actuary yet, and it is nigh impossible to accurately estimate the breakdown between payroll taxes and taxes on benefits using the Treasury’s Monthly Treasury Statement, I’m using the Fiscal Year numbers (which run from October 1 of the prior year to September 30 of the current year) from Social Security. In FY2008, Social Security took in $671.8 billion in payroll taxes and $17.8 billion in taxes on benefits for a total tax take of $689.6 billion. In FY2009, while the total tax take of $689.0 billion was hardly changed, the mix of payroll taxes and taxes on benefits radically changed, with payroll taxes dropping to $668.2 billion and taxes on benefits increasing to $20.8 billion. In FY2010, a further increase in taxes on benefits to $22.8 billion was overwhelmed by a drop in payroll taxes to $646.6 billion, as total taxes dropped to $669.4 billion.

For those who weren’t paying attention, FY2008 and much of FY2009 was declared to be in a “recession” period, while the end of FY2009 and the entirety of FY2010 was declared to be in a “post-recession” period of “recovery”.

Revisions/extensions (6:07 pm 1/12/2011) – I read off the wrong columns in my spreadsheet for the 2010 DI fund primary deficit and 2010 DI total expenses. The figures have been corrected.

(Then-labor minister Jose) Pinera’s proposal began with scrapping the payroll tax on the country’s social security system and inviting all workers to take the money they were contributing and move it into a private pension.

Workers would be free to choose the fund, how much to put in, and at what age they would retire, with a minimal safety net built into the design. Past contributions would be refunded to workers by government bond. And anyone who didn’t like the idea was free to remain with the system as it was. It was a huge success: 95% of Chile’s workers chose the private system.

Pinera told the public to expect a compounded 4% rate of return under the private plan. But as of 2010, the average annual rate of return was 9.23%, far higher than promised.

By contrast, the U.S. social security system, which today accounts for a quarter of the U.S. government budget, is slated to give retiring workers in the next decade a 1% to 2% rate of return. And those entering the system today will see a negative return.

In order to compare apples to apples, one has to compare the rate of return to inflation. The bad news is Chile’s inflation averaged 10.72% between 1981 and 2009, which means the 9.23% rate of return only covered 98.7% of inflation. The ugly news is that is still better than the SocSecurity rate of return compared to the likely rate of inflation over the next decade, in which the rate of return is expected to cover barely 98% of inflation.

Let’s move to the effect on government finances:

Chile’s implicit pension debt fell to just 6% of GNP — compared with 100% in the U.S., 300% in France and 450% in Italy, leaving Chile with no net debt.

Better still, the accumulated savings in the pension funds fueled Chile’s spectacular economic ascent, taking real incomes from about $4,000 per capita in the early 1980s to $15,000 today, and GDP to the 6% range most years for nearly 20 years.

That, folks, is the real payoff; a government and a people able to weather economic storms that is sinking the rest of the world. Even when one takes out the dysfunctional Disability Insurance, the cost of providing the benefits of the Old-Age and Survivors Insurance (including a transfer of funds to cover railroad retirees) outstripped the taxes paid by $2.14 billion on $577 billion of benefit payouts, and $6.06 billion on $580 billion in total program cost, in FY2010. That’s $6.06 billion that, because of the nature of the “Trust Funds”, the Treasury had to borrow, which gives the lie to the accounting trick that counts “interest earned” by said “Trust Funds” as income into Social Security.

With the level of publicly-held debt rapidly approaching 100% of GDP, and current trends showing that increasing at an exponential rate, how long can it be before everybody stops buying US Treasuries? The first time that happens, the value of those “Trust Funds” will be $0.00, and we’ll be up a swollen Shit Creek without a paddle.

October 8, 2010

* Nothing, other than combining the Old-Age and Survivors’ Insurance and Disability Insurance plans, that is.

The House Budget Republicans calculated what will happen to the Social Security benefits of those near retirement if the Social Security Trustees’ 2010 intermediate case is right and the combined OASDI “Trust Funds” are exhausted in 2037. At that point, the payroll taxes will pay for just 78% of scheduled benefits. They included a handy table of the cuts to the benefits of those who are now between 55 and 62 years old:

Click for the full-size pic

Of course, that assumes that Social Security does make it to 2037. In order for that to happen, not only does the assumption have to be right when recent assumptions have proven to be exceptionally rosy, but somewhere around $8 trillion in nominal dollars will need to be found to monetize the “Trust Funds”. There’s not so much as $0.01 available in cash to do that, so that represents an addition to the publicly-held debt, and $5.5 trillion of that represents future additions to the total debt (the $2.5 trillion in the “Trust Funds” now is part of the total debt, but not the public debt).

September 29, 2010

It’s been a while since I’ve done a full update, and in the interim, the Social Security Trustees issued their 2010 report while the Old-Age and Survivors Insurance portion of Social Security began running 12-month primary (or cash, if you prefer) deficits. This will be a long one, so do read through.

July “Trust Fund” Performance

In July, the Disability Insurance (DI) “Trust Fund” took in $7,762 million in taxes and $4 million in “interest” as it cashed in some more Treasury securities to meet its obligations, and had $10,704 million in expenses. The overall deficit of $2,938 million (or -37.83% of total income) was the third-worst in dollar terms and 6th-worst in percentage terms in the “modern” era of Social Security (which began in January 1987 as the effects of the 1983 reforms took full effect). The primary (cash) deficit of $2,942 million (-37.90% of non-interest income) was the 4th-worst in dollar terms and 14th-worst in percentage terms. That dropped the “Trust Fund” value to $193,354 million.

The 12-month overall deficit was $19,419 million (-18.35% of total income) and the 12-month primary deficit was $29,399 million (-30.68% of non-interest income). All were the worst 12-month performances in the modern era.

The Old-Age and Survivors Insurance (OASI) “Trust Fund” took in $48,092 million in taxes and $19 million in interest, and had $48,535 million in expenses. The overall deficit of $423 million (-0.88% of total income) was 21st-worst in dollar terms and 25th-worst in percentage terms. The primary deficit of $442 million (-0.92% of non-interest income) was 30th-worst in dollar terms and 35th-worst in percentage terms. The “Trust Fund” value declined to $2,407,709 million.

For the first time since the effects of the 1983 reforms took full effect, the OASI “Trust Fund” ran a 12-month primary deficit, which was $1,747 million (or -0.30% of non-interest income). The 12-month overall surplus of $106,791 million (+15.62% of total income) was the worst monetary performance since 9/1998-8/1999 and the worst percentage-of-income performance since 1/1996-12/1996.

August “Trust Fund” Performance

In August, the DI “Trust Fund” took in $7,365 million in taxes and $14 million in interest, and had $10,534 million in expenses. The overall deficit of $3,155 million (-42.76% of total income) was the worst in dollar terms and the 2nd-worst in percentage terms. The primary deficit of $3,169 million (-43.03% of non-interest income) was the 2nd-worst in dollar terms and 4th-worst in percentage terms.

The 12-month DI deficits worsened to an overall $20,001 million (-18.90% of total income) and a primary $29,976 million (-31.28% of non-interest income). The “Trust Fund” value declined to $190,199 million. To put that 12-month primary deficit another way, taxes only paid for 68.72% of Disability Insurance total outgo between September 2009 and August 2010.

The OASI “Trust Fund” took in $43,384 million in taxes and $25 million in interest, and had $48,516 million in expenses. The overall deficit of $5,106 million (-11.76% of income) was 3rd-worst in dollar terms and 4th-worst in percentage terms. The primary deficit of $5,131 million (-11.83% of non-interest income) was 4th-worst in dollar terms and 6th-worst in percentage terms. The “Trust Fund” value declined to $2,402,603 million.

The 12-month primary deficit worsened to $3,637 million, or -0.63% of non-interest income. The 12-month overall surplus declined to $104,873 million (+15.34% of total income), again the worst monetary performance since 9/1998-8/1999 and the worst percentage-of-income performance since 1/1996-12/1996.

Tax Revenues Flat Year-Over-Year

Taxes taken in for the purposes of Social Security were essentially flat for both July and August. July 2010’s tax take of $55,854 million was a mere 0.87% behind July 2009’s tax take. August 2010’s tax take of $50,749 was actually 0.18% higher than August 2009’s tax take. I mention that because in the previous update, I noted that early-2010 performance lagged well behind early-2009 performance.

2010 Trustees’ Report

The one positive I can say about the 2010 Trustees’ report is that its projections of 2010 pretty much mirror reality. Based on nothing more than wishful thinking, the Trustees, mostly appointees of President Obama, assumed that the provisions of PlaceboCare would radically increase taxable wages at the expense of spending on health insurance (which is not taxed and will not be taxed for Social Security purposes, but which will eventually be taxed to pay for various provisions in PlaceboCare). That had the effect of extending the fund-exhaustion dates for the OASI Fund from 2039 to 2040 in the intermediate case and from 2031 to 2032 in the high-cost case. That change did not change the combined OASDI fund-exhaustion dates of 2037 for the intermediate case and 2029 for the high-cost case because the DI fund-exhaustion dates dropped from 2020 to 2018 in the intermediate case and from 2016 to 2015 in the high-cost case.

The reason why I say that the increase in taxable wages, and thus taxes, is nothing but a hope is companies are already starting to either radically raise health-insurance premiums or drop health insurance entirely with no sign that wages are increasing to compensate.

With that in mind, let’s take a look at those assumptions. Under the intermediate case, the Trustees assumed that 2010 taxable payroll (the portion of wages that are subject to the FICA/SECA tax) would be $5,676 billion in the 2009 report and $5,459 billion in the 2010 report. Despite the Consumer Price Index never assumed to be above the long-term average of 2.8% in the 2010 report, while it was assumed to be as high as 3.07% (in both 2013 and 2014) in the 2009 report before returning to the long-term average of 2.8%, by 2018, the trustees assumed taxable payroll would be $8.446 billion in this year’s report, compared to $7.961 billion in last year’s report.

In the longer term, the spread between last year’s and this year’s sets of assumptions for taxable payroll, and thus taxes from said payroll, becomes even wider. For 2040, the Trustees assumed taxable payroll would be $21.258 billion (or $9.284 billion in constant 2010 dollars) in last year’s report, while they assumed the same would be $22.198 billion ($9.863 billion in constant 2010 dollars). GDP in the same year was assumed to be $59.581 billion ($26.021 billion in constant 2010 dollars) in last year’s report, and $60.794 billion ($27,011 billion in constant 2010 dollars) in this year’s report.

While there are other technical changes in this year’s report I would like to include in my “re-modeling”, I haven’t been able to figure out how to work the bogus assumption of a PlaceboCare wage increase out of the model. I will, therefore, stick with last year’s model, modified by actual performance.

The Unfunded Cliff

The most-popular measure of how far in the red the combined OASDI “Trust Funds” are is the “75-year open-group unfunded obligation”. That measure, expressed in “present-value dollars”, which assumes the effects of both inflation (2.8%) and the long-term interest rate “earned” by the “Trust Funds” (5.7%), is how much money would need to have been put into the combined “Trust Fund” at the beginning of that particular year for it, along with every penny of tax possible over the succeeding 75 years, for the fund to not hit zero before the end of that 75 years. In January 2009, the Treasury would have needed to come up with $5.3 trillion to put into the “Trust Funds”, and then combined the operations of the two, to get Social Security through the end of 2083. In January 2010, the Treasury would have needed to come up with $5.4 trillion to get things to the end of 2084.

Even though using “present-value dollars” is a generally-accepted accounting practice, that grossly understates the problems in two ways. The first is that it does not leave any money in Social Security at the end of the 75 years, while there would be a long line of people promised that money.

There are two alternate measures that take differing looks at that; the “infinite open-ended obligation”, which extends the 75th-year conditions out to the indefinite future, and the “infinite closed-ended obligation”, which only takes the taxes for those who were at least 15 years old the year of the report and then pays out until the last one of them dies.

The “infinite open-ended obligation”, which is a test of the very-long-term viability of Social Security, was $15.1 trillion in “present-value” as of 2009, and $16.1 trillion in “present-value” as of 2010. Of note, while the various methodology changes resulted in a positive change at the 75-year level between 2009 and 2010, those same methodology changes resulted in a further negative change on the infinite level.

The “infinite closed-ended obligation” measures what it would take to pay those even marginally-promised Social Security with just the money paid by those people. Last year, the “present-value” of that unfunded obligation was $16.3 trillion. Now, it’s $17.4 trillion.

That leads me to the second way the “present-value dollar” amount grossly understates the problem. It assumes the money to pay off the “Trust Funds” and service the future interest is there. News flash; the only thing that is there is a promise to pay off the “Trust Funds” in full, and specifically, there is no authority for Social Security to borrow funds to meet its obligations. Using last year’s Trustees’ report as a guide, with the only modification being putting the combined funds’ August 2010 balance in instead of the calculated balance for August 2010, it would take $7.9 trillion over the next just-over-26 years to monetize the Trust Funds as the securities get called. With total outgo at about $45.2 trillion (and actual benefits less than that) over those same just-over-26 years, about 17.5% of what is allegedly fully-funded is actually an addition to the publicly-held debt. Of note, that does not count the interest to service that debt, which would also be borrowed, which would be significant both in the just-over-26-year period and beyond.

The nightmare really begins after the “Trust Fund” dries up because at that point, Social Security would be limited to paying out what it took in in taxes. In 2038, $0.759 trillion of the $3.32 trillion in theoretical outgo (22.9%) would not be able to be paid out. In 2050, $1.091 trillion of $5.457 trillion (20.0%) cannot be paid out. In 2060, $1.722 trillion of $8.445 trillion (20.4%) could not be paid out. In 2083, the last year of the 75-year look from 2009, $5.152 trillion of $23.840 trillion (21.6%) could not be paid out.

July 13, 2010

The Treasury released its June 2010 Monthly Treasury Statement, and things just keep on getting worse for Social Security. Do bear in mind these numbers are still preliminary because the Social Security Office of the Chief Actuary hasn’t finalized them yet, but let’s run with them.

Overall

I really should not do the combined numbers anymore because the two “trust funds” are separate entities, but since everybody else still does them, I’ll briefly touch on it. They took in a total of $56,808 million in taxes, received $59,072 million in “interest” (because this is one of the two times interest is credited to the entire holdings), and paid out $63,308 in expenses. That left a gross increase in assets of $52,572 million (45.37% of total revene) and a primary (cash) decease in assets of $6,500 million (-11.44% of tax revenue). The 12-month gross surplus was $90,183 million, while the 12-month primary deficit was $28,260 million.

DI “Trust Fund”

The Disability Insurance “Trust Fund” had $8,249 million in taxes, $4,706 million in interest, and $11,018 million of outgo. That netted a monthly overall surplus of $1,778 million (worst June since 1994) or 14.95% of total revenue (also the worst June since 1994), and a monthly primary deficit of $2,769 million (5th-worst month, outside the “double-payment” month of August 1990, since monthly recurds were kept starting in 1987) or -33.57% of tax revenue (9th-worst “not-screwy” month since monthly records were kept).

The 12-month overall deficit was $18,725 million (worst since monthly records were kept) or -17.68% of total revenue (also worst since monthly records were kept). That meant that the “trust fund” lost 8.78% of its value over the past 12 months.

The 12-month primary deficit was $28,708 million (worst since monthly records were kept) or -29.93% of tax revenue (also worst since monthly records were kept). Put another way, tax revenues only covered just under 77% of the costs of the DI program.

OASI “Trust Fund”

The Old-Age and Survivors “Trust Fund” had $50,635$48,559 million in taxes, $54,366 million in interest, and $52,290 million of outgo. That netted a monthly overall surplus of $54,366 million (worst June since 1994) or 49.20% of total revenue (worst June since 1999, prior to the latest realignment of the FICA/SECA taxes between the two “trust funds”), and a monthly primary deficit of $3,731 million (4th-worst month, outside the “double-payment” month of August 1990 and the transfer of revenues to the DI “Trust Fund” in November 1994, since monthly records were kept) or -7.68% of tax revenue (7th-worst “non-screwy” month since monthly records were kept).

The 12-month overall surplus was $108,910 million (worst since 9/1998-8/1999) or 15.93% of total revenue (worst since 5/1996-4/1997). Of note, the earlier dates were when less of the FICA/SECA tax was being directed to the OASI “Trust Fund” than currently.

The 12-month primary surplus was $375 million (worst outside the effects of the November 1994 transfer of revenues to the DI “Trust Fund”) or 0.07% of tax revenues (again the worst outside the effects of the November 1994 transfer of revenues to the DI “Trust Fund”). Of note, the two worse 12-month periods for the OASI saw a change of +$112 million (+0.04% of tax revenue) between 10/1994 and 9/1995 and -$825 million (-0.28% of tax revenue) between 11/1994 and 10/1995 due to that transfer to save the DI “Trust Fund”.

Tax revenues keep on sliding

The conditions of the “Trust Funds” are bad enough. However, that’s not the worst of the immediate news. Based on what the taxes taken in for the purposes of Social Security (FICA, SECA, and taxation of benefits) had been for the first 5 months of this year compared to the first 5 months of last year, Social Security tax revenues should have been around $58,540 million, or about 4.63% lower than the $61,383 million collected in June 2009. Instead, only $56,808 million came in to Social Security’s coffers in June 2010, a 7.45% drop from June 2009. That also was an overestimation of 2.96% on my part.

On the bright side, the outgo of $63,308 million was slightly less than my estimate of $63,984 million. I missed it by a mere 1.06%.

Revisions/extensions (6:36 pm 7/13/2010) – Corrected the characterization of the 12-month OASI primary change. It’s not until this month that it will go into the red. Also, added the “Economy Held Hostage” category that Shoebox started up earlier today.

R&E part 2 (8:18 pm 7/14/2010) – I somehow listed my spreadsheet estimate of taxes taken into the OASI fund instead of the Treasury figures. Sorry about that.

The administration is trying to delay the report until mid-August, when it’s hoping the country will be on vacation and won’t notice. Or maybe the delay is because the White House is trying to bludgeon the chief actuaries for Medicare and Social Security into fudging the numbers.

Those chief actuaries are dedicated, career professionals who have worked their way up the bureaucracy over decades.

During the Reagan administration, the congressional Democrat majorities and the New York Times made clear to us that tampering with the work of the government’s career professionals, let alone the career number crunchers, would be grounds for impeachment.

I’m not certain the rule of law applies to this administration, where the Justice Department cites “payback time” as its reason for not prosecuting Black Panther Voting Rights Act violations.

Point of order – while the report is done by the career actuaries, they’re signed by the political masters, five of whom are hand-picked by Obama (the Secretaries of Treasury, Labor, and Health and Human Services, and two Public Trustees, whose positions were vacant as of last year). I’m not taking bets on which scenario is actually happening because an objective view of either program, especially Social Security, would show that things are a lot worse than they thought just last year.

Since the Social Security Trustees are late with their already-delayed annual report, I decided to take a look at the much-larger Old-Age and Survivors Insurance (OASI) portion of Social Security. The Cliff’s Notes version, for those of you who don’t want to wade through the details on a holiday weekend, is that once again, the Trustees were overly optimistic last year. The OASI “Trust” Fund will begin running annual primary (cash) deficits this month, will likely begin running overall (including interest) deficits sometime between 2014 and 2020, and will likely be exhausted sometime between 2026 and 2033, with the latter two breakpoints depending on which rate-of-cost-growth one selects.

Like the look at the DI Fund, I assumed that tax revenues and outgo would do for the rest of 2010 what they did for the first 5 months (tax revenues decreased by 4.1%, outgo increased by 4.0%), that the interest rate would be 5% (a bit higher than the current weighted average of 4.880% and significantly higher than the 2.875% new bonds/certificates of indebtedness earn), and that tax revenues would increase by 5.3% starting in 2011 (ahead of the 1996-2006 average of 5.234% for the total FICA/SECA tax). Outside of a couple of “recovery” years, that 5.3% increase in tax revenues is also higher than anticipated in the 2009 Annual Report.

Because there will be a “bubble” of retirees over the next 20 years, I could not simply use either the rate of cost increase between the first 5 months of 2009 and the first 5 months of 2010 (like I did for the “base” DI scenario) or the average rate of cost increase between 1996 and 2006 (like I did for revenues). Instead, I calculated the annual increase of outgo using the percentages from the 2009 Annual Report, using a 2-year average for 2019 and 2020 and a 5-year average after 2020 because annual numbers were not available. Since the “low-cost” estimate is unrealistically optimistic (it claimed that even the DI “Trust” Fund would never run out of money), I used the “intermediate” and “high-cost” estimates for that, and ran the numbers twice.

As a review, the 2009 Annual Report claimed that, under the “intermediate” scenario, the OASI “Trust” Fund would run a yearly primary surplus until 2020 and a yearly overall surplus until 2024. Also, it would not be exhausted until 2041. Under the “high-cost” scenario, the yearly primary surpluses would last until 2014, yearly overall surpluses would last until sometime after 2018 (a specific year was not given), and the fund itself would last until 2031.

Fast-forward to this year. Unless something drastically changes between May and July, the 12-month primary deficit in the OASI fund will begin in the August 2009-July 2010 period (that’s this month, and 4 years before the high-cost estimate from last year), with the FY2010 primary deficit of $9.781 billion and a calendar-year 2010 primary deficit of $20.779 billion.

Assuming future cost growth at the “intermediate” rates, the yearly primary balance never quite gets out of the red in the intermediate term, coming no closer than $10.592 billion between March 2011 and April 2012. The yearly overall balance would flip to the negative side in 2020, and the fund itself would run out in 2033.

Before those of you who think that there really is a pot of gold at the end of every rainbow and that unicorn farts smell like Skittles start hammering me for being pessimistic, remember that I used a high estimate of tax revenue increase. Proof of that is the results of taking the estimates further out to 2085, which is as far as the Trustees go. Because, unlike the “intermediate” model from the Trustees, revenues increase faster than costs, this model projects the OASI “Trust” Fund goes back into the black in 2058. That is rather unlikely because under the “intermediate” model, the closest the OASI operation comes to running a yearly primary surplus after fund exhaustion is sometime between 2050 (when the primary balance is -2.98% of taxable payroll) and 2060 (balance of -3.06% of payroll), and likely near 2055 (balance of -2.96% of payroll).

Now, let’s take what the Trustees assumed to be the “intermediate” case for tax revenue increases from 2011 onwards and plug that back into the spreadsheet. Since they assumed roughly a 6% increase in 2012 and 2013, the OASI “Trust” Fund does get closer to the black on a yearly cash basis, getting as close as a $7.720 billion primary deficit between February 2012 and January 2013. However, they also assume a lower increase in tax revenues the other years, which means the fund goes into a yearly overall deficit in 2019, and runs out of money in 2030, never to go into the black again for more than one month in twelve (specifically, April).

It gets worse if future cost growth is at the “high-cost” rate. That is more likely given the first 5 months of 2010 have been more costly than even the 2009 high-cost estimate projected. Assuming either the flat 5.3% tax-revenue growth the “base” scenario does or the variable tax-revenue growth assumed by the Trustees in the 2009 “high-cost” estimate, the yearly overall balance would flip to the negative side in 2016, the last monthly overall positive balances in the intermediate term (long-term using the Trustees’ tax-revenue numbers) would be in April 2022 (on the strength of taxes) and June 2022 (on the strength of interest), and the fund would be exhausted in 2026.

Revisions/extensions (7:25 pm 7/3/2010) – The power of a HotAir-lanche is truly awesome. At last check, somewhere over 2,000 of you popped in here off the Headline Ed/Allahpundit put up. I can’t thank you enough for dropping in this little corner of the ‘Tubes, and Shoebox and I hope you stick around a while.

June 24, 2010

I know; the Trustees report is due out in a few days, but there’s some things that won’t wait until then. This time, I’ll focus specifically on the Disability Insurance (DI) portion of the matter. If you don’t want to wade through the whole post, the Cliff’s Notes version is that the DI “Trust” Fund suffered its first negative April since the effects of the previous major Social Security overhaul took full effect in 1987, and that it appears even the high-cost estimate in last year’s Trustees report was optimistic, with the DI fund now looking to be exhausted by the end of 2015 instead of by the end of 2016 in the 2009 high-cost estimate and by the end of 2020 in the intermediate estimate.

Before I get to the heart of the matter, I first need to do two months’ worth of housekeeping. In April, when just about everybody with a tax bill settles up and those who make quarterly estimated payments do so in the greatest of numbers, the combined Old-Age and Survivors/Disability Insurance (OASDI) funds took in $76,672 million, including $138 million of interest, and had expenses of $58,948 million for a gross increase of $17,724 million (or 23.12% of gross income), and a primary (cash) increase of $17,586 million (or 22.98% of ex-interest/net receipts). That pushed the 12-month primary deficit to $18,732 million, and dropped the 12-month gross surplus to $99,599 million (the first sub-$100,000 million 12-month gross surplus since 10/1997-9/1998).

In absolute terms, it’s the worst primary April performance since 1999 (with a $17,506 million increase on $49,810 million of tax revenue) and the worst gross April performance since 1998 (with a $15,502 million increase on $46,804 million in gross revenue). In percentage terms, that’s the worst April since monthly records were made available in 1987.

May didn’t show any real improvement over recent months, with the combined funds posting a combined $5,087 million gross/$5,177 primary loss on $53,859 million in gross receipts ($90 million in interest) and $58,946 million in outgo. The 12-month primary deficit grew to $21,987 million, and the 12-month gross surplus shrunk to $96,268 million.

This is not the first time since 1987 that the DI Fund faced imminent exhaustion. Indeed, in 1994, it came within 2 years of running out of Treasury securities to draw upon. The fix back then was to transfer the majority of the November 1994 tax revenue from the Old-Age and Survivors Insurance (OASI) Fund and increase the portion of the FICA/SECA tax that went into the DI Fund. That fix, which worked back then because the OASI Fund was running in the black, won’t work this time because, outside the “taxation” months of January and April, the OASI Fund has been running a primary deficit since July 2009.

Specifically to April, even in April 1994, the DI Fund ran a monthly surplus of $492 million ($473 million net) on $3,722 million of receipts ($19 million of interest) and $3,230 million of outgo. Now, the DI Fund has run 13 months of consecutive monthly primary deficits (through May), with the only monthly overall surpluses coming as a result of the semi-annual crediting of interest in June and December. The latest 12-month overall deficit (6/2009-5/2010) was $17,167 million, over 8.3% of the end-of-May fund value of $194,355 million.

That leads me to the bad news on the end of the DI “Trust” Fund. I decided to plug some numbers into the spreadsheet to see just how fast the fund would cease to exist. I assumed that tax revenues would, for the rest of 2010, continue to lag behind 2009’s by just under 5.2% (as they have for the first 5 months), then increase by 5.3% (actually a bit higher than the 1996-2006 annual average of 5.234% for the total FICA/SECA tax). I also assumed that outgo would increase by the 5.464% that it went up for the first 5 months in 2010 versus the first 5 months of 2009 (significantly lower than the 1996-2006 annual average of 7.613%), even though 2010’s increase is solely due to the increased number of those drawing from Social Security, and that the interest rate would be at 5% (a bit higher than the current weighted average of 4.880% and significantly higher than the 2.875% new bonds/certificates of indebtedness earn).

With a starting point of $194,355 million in the DI “Trust” Fund at the end of May 2010, and assumptions that are actually favorable to the longevity of the “Trust” Fund, here are the projected DI “Trust” Fund balances at the end of each calendar year:

December 2010 – $178,728 million (projected to be the first “interest” month with an monthly overall deficit, with June 2010 having the only monthly overall surplus of 2010)
December 2011 – $151,653 million (again with June 2011 having the only monthly overall surplus of 2011)
December 2012 – $118,899 million (with June 2012 having the only monthly overall surplus of 2012, and June 2012 also having the last monthly overall surplus in this scenario)
December 2013 – $83,281 million
December 2014 – $43,428 million
December 2015 – EXHAUSTED (November 2015 would see a DI fund balance of $4,839 million)

Even if I were to assume the 5.3% tax growth beginning in June 2010 instead of January 2011, it doesn’t get much better. The DI “Trust” Fund barely makes it into 2017 before it disappears.

As a reminder, under current law, at the point the DI fund is exhausted, benefits would have to be cut by the percentage the tax revenues don’t meet demand. No, it can’t even tap into the OASI “Trust” Fund to avoid average benefit cuts of over 25%.

Revisions/extensions (7:05 pm 7/2/2010) – Partly because the Social Security Administration missed their delayed deadline for the annual report, and partly because I had to adjust my outgo assumptions for the OASI “Trust” Fund estimates, I have re-run the numbers using the increases anticipated in the “Intermediate” and “High-Cost” scenarios in the 2009 Trustees Report.

Since the Intermediate scenario assumes that the cost of running the DI portion of Social Security rises slower than the 5.464% it went up in the first 5 months of 2010, the DI “Trust” Fund makes it to December 2016 before being exhausted. Further, unlike the “base” scenario outlined above, the DI operations would be able to pay out the entirety of the scheduled payments for a couple Aprils after fund exhaustion.

The bad news is the “High-Cost” scenario assumes the cost of running the DI portion of Social Security rises even faster than my assumption. Plugging that back into the spreadsheet yields fund exhaustion in July 2015.

May 4, 2010

Before I get to the Social Security Administration’s Office of the Chief Actuary’s score of Paul Ryan’s Roadmap for America’s Future, I do have to recap the March 2010 “Trust Fund” performance. The combined funds took in $51,549 million in total income, including $97 million in “interest”, and paid out $58,296 million. That resulted in a gross monthly deficit of $6,747 million (3rd-worst peformance since monthly records from 1987 became available, beaten only by February 2010 and an anomalous August 1990) and a primary (cash) deficit of $6,844 million (4th-worst performance since 1987, behind the two aforementioned months and December 2009). The 12-month changes in the trust funds were +$102,423 million gross (worst since 12/1997-11/1998) and -$15,833 million primary (worst since monthly records were kept in 1987).

Once again, both components of the fund ran both gross and primary monthly deficits – the Disability Insurance fund ran a $2,881 million gross/$2,902 million primary monthly deficit (12-month deficits of $15,688 million gross, bringing its balance to under $200,000 million, and $26,159 million primary), and the Old-Age and Survivors Insurance fund ran a $3,864 million gross/$3,940 million primary monthly deficit (12-month surpluses of $118,115 million gross and $10,257 million primary, the latter its worst performance since the effects of an anomalous performance in November 1994 were aged off).

That brings me to the OACT’s scoring of the Roadmap. They dusted off their 2009 Intermediate Scenario, plugged Ryan’s proposal into it, and pronounced that it would make Social Security solvent over a 75-year period with no net transfers from the general fund (I can’t stress the “net” enough). How does that happen? Let’s take a look at Ryan’s plan:

The big one is the partial-privatization. Starting in 2012, those who hadn’t turned 55 yet could divert a part of their Social Security tax to a personal retirement account managed much like the government employees’ Thrift Savings Plan. That starts at 2% of the first $10,000 of covered earnings and 1% of covered earnings in excess of $10,000 (that indexed for inflation), rising to the maximum 8%/4% in 2042.

Those who participate would have their “traditional” Old-Age and Survivor Insurance (the main part of Social Security) payments reduced by the percentage of theoretical maximum participation (i.e. those who fully-participate starting in 2042 would receive $0 in “traditional” OASI payments). However, they would receive a guarantee that their account balance at retirement would not be less than their contributions accumulated by the rate of inflation (Consumer Price Index for Urban Wage Earners and Clerical Workers), with Social Security making up any shortfall.

At retirement, they would be required to purchase annuities that, combined with any OASDI (this includes any disability payments from Social Security) payments, would guarantee them monthly payments of at least 150% of the federal poverty level. The entirety of the personal retirement account, including the annuities, any excess amount after purchase of the annuities, and any pre-retirement death distributions to a designated beneficiary or the estate, would be tax-free.

Potentially the most-controversial part is capturing employer-provided health-care benefits in the payroll tax. I’ll let the OACT summary describe it – “Specifically, any cost toward such group health insurance borne by employees would cease to be deductible, and the cost borne by employers would now be allocated to employees as if it had been wages, for the purpose of payroll tax (and later, benefit) calculations. Both employee and employer OASDI payroll taxes would be affected by this proposal.”

The first of two elements to make Social Security more “progressive” also may face problems: the top-earning 70% of newly-retiring workers starting in 2018 would have their OASI benefit-growth rates reduced from average wage growth to, those making at least the maximum taxable amount having benefit-growth rate at average CPI growth. Those between the maximum taxable amount and the 30th-percentile would have a sliding-scale reduction of growth to somewhere between CPI and wage growth, and the bottom 30% would see no change.

The second “progressive” element would increase OASI benefits for those making less than 200% of the 2009 minimum wage (indexed for wage growth) for more than 20 years, reaching a maximum OASI payment level of 120% of the poverty level (assuming no PSA participation) for those making the 2009 minimum wage (indexed) for at least 30 years.

The Normal Retirement Age change would be accelerated from 67 in 2022 to 67 in 2021, and indexed to keep it at 20 years below the life expectancy thereafter.

The solvency of the “Trust Funds” would be statutorially-guaranteed at 100% of the following year’s estimated cost (the Trust Fund Ratio), with the Treasury selling bonds to cover the cost. The “Trust Funds” would be authorized to repay that up to the point of the Trust Fund Ratio being a minimum of 125%.

I’ve been a bit too busy to fully take a look at it to see what could be culled and still have it make long-term actuarial sense. The taxation of employer health benefits isn’t “exactly” supportable, and the “Trust Funds” will continue to be raidable. Given the two scenarios that the OACT provided, I don’t know if the solvency guarantee is necessary.

We’ve been writing about this for the last few years, and when we wrote about it, we presented the entire political backstory, including how Barack Obama’s OMB Director Peter Orszag predicted in 2008, while running the CBO, that this day would come — in 2019. We included mentions of how Harry Reid and other Democrats insisted in 2005 that George Bush was scaremongering when he attempted to reform SSA through partial, elective privatization, and how they assured us that Social Security was safe for decades without reform.

Does the Times mention any of this? Not exactly. In fact, the name “Orszag” doesn’t appear once, nor does the name “Reid.” Guess how many times the name “Greenspan” appears in this article by Mary Williams Walsh? Five:

One thing Ed left out of that – in the FY2010 budget prepared by Orszag, he predicted there would be a $21 billion primary (cash) surplus in Social Security. Depending on whether one believes the OMB or the Congressional Budget Office, the primary deficit is somewhere between $29 billion and $34 billion, or a miss of $50 billion-$55 billion in a program with somewhere around $700 billion of cash outflow.

One more thing – that CBO $29 billion estimate might yet be low – it is unclear whether the money to pay for the second round of $250 pay-o…er, “stimulus” checks that Obama wants to hand out would come out of the “Trust Funds” or the general fund. If it’s the former, it would add another $12 billion to the former estimate, making that hole $41 billion.

Back to Ed:

Forget those two years of black ink, too. That will only happen under the rosiest of scenarios for economic growth and employment. As the recession’s effects continue, people will continue retiring earlier or not going back to work. SSA’s revenues will continue to plateau before dropping steeply as the rest of the Baby Boomers leave the workforce and demand their benefits.

Some people predicted this day would arrive at about this time; those were the people Democrats accused of attempting to frighten seniors out of their benefits. Some predicted that this day wouldn’t come for almost a decade longer than it did and argued that reform wasn’t necessary in 2005, when it may have helped extend SSA’s life. Those are the people making the economic decisions in the White House now.

That leaves Social Security, the other big entitlement benefits program and one that Mr. Obama has suggested in the past that he is willing to tackle. While its looming problems are not of the scale of those afflicting Medicare, it now stands as the likeliest source of the sort of large savings needed to bring projected annual deficits to sustainable levels, many budget analysts agree.

And, they say, packaging future reductions in the retirement program that Democrats zealously defend with tax increases that Republicans typically oppose would have the makings of a grand compromise to shrink the debt.

“You would think that there ought to be a way to get together and talk about a balanced package of some changes in benefits and some increases in revenues that would actually help Social Security,” said James R. Horney, the director of federal fiscal policy at the Center on Budget and Policy Priorities, a liberal-leaning research organization….

Yet Representative Steny H. Hoyer, the moderate Democrat who is the House majority leader, gave a speech this month in which he called for the two parties to compromise on a mix of tax increases and benefit reductions to avert fiscal chaos. Among his options were proposals to gradually raise the retirement age for future Social Security recipients and to reduce benefits for those with high incomes.

I’ll ignore the misapplication of “moderate” to Hoyer. This was tried in 1983, with benefit reductions (in the form of taxation of benefits, and a raising of the “full-benefits” retirement age from 65 to 67) and tax increases (a 14% increase on both sides of the withholding tax and a 64% increase in the self-employment tax). At the time, it was deemed a “forever” fix. That “forever” fix has lasted 22 years on a combined yearly cash-surplus basis, almost certainly won’t last 30 years for the Disability Insurance portion of Social Security, and likely won’t last 50 for the bigger Old-Age and Survivors Insurance portoin.

I’ll go back to what I said last month when Obama floated the idea of lifting the cap on those taxes out in Henderson, Nevada:

As for Obama’s claim that eliminating the cap would make Social Security solvent long into the future, let’s take a quick look at that. Assuming that it has no effect on on the economy, removing the cap would increase the FICA/SECA tax take by roughly 21%. Some very-back-of-the-envelope number-crunching refreshes my memory of a semi-forgotten study that found that lifting the cap entirely would only delay the inevitable decline and collapse of Social Security by roughly 15 years. Ever-so-conveniently, that would move fund exhaustion barely beyond Obama’s life expectency.

March 15, 2010

The Associated Press praised the AlGore “lockbox” in its story discussed earlier, and Glenn Reynolds and Andy McCarthy asked where the “lockbox” was, so I figure it’s time to explore what creating said “lockbox” would do for the current cash-negative situation. The very-short version is that while there would be actual money in the “Trust Funds” to pay for the cash shortfall, which still would exist at the same level with or without the “lockbox”, that same money would have already needed to be borrowed on the open Treasury securities market. The longer version is a bit lengthier.

First, let’s take a look at Social Security as it was at the end of January 2001. The Old-Age and Survivors Insurance (OASI) Fund was “worth” $945 billion, with the weighted average interest of the securities held at 6.640% and the average time to maturity at 6.914 years (note; while most of those securities have since matured and been rolled over into new securities, some of those securities don’t mature until 2015). The Disability Insurance (DI) Fund was “worth” $121 billion, with the weighted average interest of the securities held (which included some since-retired public-issue debt) of 6.426% and average time to maturity at 6.828 years.

Since then, the OASI Fund has taken in $630 billion more in cash than it has paid out (i.e. primary surplus) with $776 billion in interest credited to it, giving it a “value” of $2,350 billion. Meanwhile, the DI Fund has had a primary deficit of $10 billion with $93 billion in interest credited to it, giving it a “value” of $203 billion. Between February 2009 and January 2010, the OASI Fund has had a primary surplus of $23,504 billion (down from a $71,637 billion primary deficit between 2/2008 and 1/2009) with $107.901 billion in interest credited to it, while the DI Fund has had a primary deficit of $23.611 billion (up from $10,687 billion primary deficit between 2/2008 and 1/2009) with $10.467 billion in interest credited to it. Signifcantly, that’s an overall 12-month deficit of $13.144 billion for the DI fund.

Now, let’s try to define the “lockbox”. There’s actually several different flavors possible, involving what gets put into the “lockbox” (just the taxes received after creation, the “new” taxes and interest, the entirety of the “Trust Funds” immediately upon creation, the values of the various securities as they mature), and on what interest gets paid (just those items in the “legacy Trust Fund”, everything). Some of those scenarios are beyond my ability to model, so I’ll just take four of the relatively-easy-to-model scenarios, while noting that while economically it makes no sense to credit interest to funds in the “lockbox”, it would also be political suicide even as it would require cash that the Treasury doesn’t have.

First, I’ll take just “future revenues” locked away, with no interest credited to them, and the current “legacy Trust Funds” along with interest credited to them rolled over into fresh Treasury securities as they are now. I’m likely overestimating the interest that would have been credited to the “legacy Trust Funds”, which would get put right back into the Treasury as it is now, but it’s close enough for government work. The “lockbox” amounts would have been the 9-year amounts listed above (+$630 billion for OASI, -$10 billion for DI). That’s right – that DI “lockbox” would have been emptied by this point. Meanwhile, the “legacy funds” would have been about $1,520 billion for OASI and $179 billion for DI, bringing the total nominal OASI fund amount to about $2,150 billion. That would have moved up the fund-exhaustion dates by a couple years. Assuming nothing in the budget would have been cut, the 9-year deficit spending would have increased by $640 billion, or an average of about $71 billion per year.

Next, I’ll add the interest earned by the “legacy funds” to the lockbox as cash. Since it no longer would have compounded, that interest would have been a bit less than in the first option, or about $470 billion for OASI and about $57 billion for DI. However, since it would have been added to the “lockbox”, both OASI and DI “lockboxes” would have been in positive territory (+$1,100 billion for OASI, +$47 billion for DI). However, since the “legacy funds” would have remained at the January 2001 levels, that would have left the total nominal funds at $2,050 billion for OASI and $177 billion for DI. Again, that would have meant the funds would be a bit closer to exhaustion, and it would have increased the 9-year deficit spending by $1,157 billion (or roughly $129 billion per year).

Third, I’ll look at the full-on “lockbox”, immediately liquidating the entirety of the “Trust Funds”, putting everything in the “lockbox”, and foregoing all future interest payments. Because interest earned in January 2001 would have been paid out, the total amount going into the “lockbox”, would have been about $956 billion for OASI and $122 billion for DI. That would have created a rather massive deficit for 2001, as to create that “lockbox”, the federal government would have needed to come up with $1,078 billion. With only primary surpluses and deficits affecting the “lockbox”, that would have left the balances at $1,586 billion for OASI and $112 billion for DI. That would have really cut into the lifetime of the funds, but they would at least have been fully-funded until exhaustion. Further, the 9-year deficit spending would have further increased by the same $640 billion as the first scenario.

Finally, I’ll take that full-out “lockbox” in scenario three, but still credit the interest. As I noted above, while it would fly politically, it would make no sense economically, as the Treasury, and by extension, we the taxpayers, would be paying for the use of money that we wouldn’t be able to use. The only difference between that scenario and the current scenario is that instead of $2,554 billion in unfunded IOUs, there would be $2,554 billion in cash. Of course, that would also mean the 9-year deficit spending increase would have been that same $2,554 billion.

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds — which are kept in a nondescript office building just down the street from Parkersburg’s municipal offices.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn’t be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

I give the writer, Stephen Ohlemacher, credit for remembering that even the net interest paid on the bonds is, if it needs to be paid out in cash, something the Treasury Department doesn’t have so much as a penny to pay out. A few points of order:

Those 12-month primary (or cash, if you prefer) deficits actually began in the February 2009-January 2010 period, when Social Security ran a $114 million primary deficit. An estimation using numbers from the Febraury 2010 Monthly Treasury Statement, which shows a $7.59 billion “gross” deficit (including the interest paid out on securities cashed in February) and a $7.71 billion primary deficit, bumps that 12-month primary deficit to $6.47 billion (between March 2009 and February 2010).

That nearly-$29 billion cash deficit for FY2010, or $34 billion if one prefers to go with the Office of Budget and Management numbers, tells only half the story. The FY2010 budget counted on $21 billion in primary surpluses from the Social Security “Trust Funds” to spend on other items in the budget, which makes the total amount of unplanned borrowing on the open Treasury market $50 billion-$55 billion.

Also from the OMB, for at least FY2010, the Old-Age and Survivors Insurance Fund is expected to run a primary deficit. It would join the Disability Fund, which began running primary deficits in 2005 and running gross deficits (i.e. shrinking its “Trust Fund” and entering the final stage of collapse) in 2009.

A quick note about the February 2010 numbers – while they are not the final numbers from Social Security’s Office of the Chief Actuary, they are rather reliable. They also represent, outside of the anomalous month of August 1990, when almost all of September 1990’s benefits were shown as paid out in August, the second-largest primary deficit (behind December 2009’s $11.307 billion primary deficit) and the largest gross deficit since monthly records have been kept in January 1987.

Even if we had taken Al Gore’s suggestion and put it the “Trust Funds” into a “lockbox”, it would, at best, only delay the inevitable. Between March 2001 and February 2010, the funds accumulated $869 billion in interest, and the primary growth was $607 billion, which together masked $1,475 billion in deficit spending over the last 9 years. Given the current problem is converting the “Trust Funds” to cash, and the problems both parties have had in saying no to spending, I don’t see how that “lockbox” would have helped any.

Revisions/extensions (3:19 pm 3/15/2010) – I really need to pay more attention to my feed reader over the weekend – Owen had it up yesterday.

R&E part 2 (7:00 pm 3/15/2010) – First, thanks to Ed for linking to me. Sorry about the problems that you may have experienced in loading this site; StatCounter had some issues.

Since Glenn Reynolds wanted to know what happened to the “lockbox”, I decided to take a somewhat-quick back-of-the-spreadsheet look at what would have happened had a “lockbox” been in existence the last 9 years. Do note that it would not have affected the primary deficits in the least, but it would have put at least some actual money into the “Trust Funds” for the future.

March 8, 2010

Revisions/extensions part 2 (10:16 am 3/8/2010) – I originally posted this on February 22 using estimates from the January 2010 Monthly Treasury Report to fill in the numbers for January 2010. The Social Security Office of the Chief Actuary has now released the final numbers for that month, and the news is worse. The original post is below the fold (unless you’re reading just this post, in which case it’s below the update). I decided to append to this and bump it up to today’s date.

Between February 2009 and January 2010, the combined OASDI Social Security “Trust Funds” spent $112 million more than it took in in taxes. As noted in the original post (below), the 12-month primary (or cash) deficit is the first since monthly records were kept in 1987, and likely the first since the “forever” fix of 1983.

The estimate using the Treasury’s numbers was a $91 million primary deficit, which instead of proving too pessimistic based on recent analysis of the difference between the Treasury Monthly Statements and the OACT final numbers, proved to be too optimistic.

To contrast, just last year, the Obama administration expected the FY2010 primary surplus in the combined “Trust Funds” to be $21,028 million (or $21.028 billion – I will use a single base to make sure the numbers hit home) as part of its FY2010 budget. Now, it’s estimated to be a $33,754 million deficit, a shift of $54,782 million to the red. That’s $54,782 million that, thanks to the well-over $1,000,000 million (or $1 trillion) deficit that was already planned for this year, needs to be borrowed by the Treasury on the open market.

The situation is not yet as dire as it was between 1975 and 1981, when the combined funds ran overall yearly deficits, or 1982, when the Old-Age and Survivors Insurance fund borrowed from the Hospital Insurance (Medicare Part A) fund to stay fully-capitalized. However, raising the withholding tax 14% and the self-employment tax 64% isn’t exactly going to play well, and like the previous time, it will only slow the inevitable.

March 6, 2010

Tom Blumer’s latest column at Pajamas Media uses the history of Social Security, Medicare, and Fannie Mae/Freddie Mac to knock down the continuing myth that liberals are smarter than everybody else, as well as explode the idea that the federal government be awarded the remainder of the health care system. Since my acquired “specialty” is Social Security, I’ll give you the meat of that portion of the beatdown:

FDR and his smarties didn’t build the improved life expectancy of future generations into the program. If they had, today’s normal retirement age would be somewhere between 70 and 75, instead of its current 66-67, depending on one’s year of birth.

The method of indexing chosen in the mid-1970s has caused benefits to go up faster than the real living standards of everyone else, and has subtly changed the program’s perceived purpose from preventing destitution to providing the means to ensure a lower middle-class lifestyle.

The smarties also didn’t anticipate lower birth rates that were already occurring, and which were then dampened even further almost 40 years later by legalized abortion. As a result, at the end of 2008 there were less than 2.6 employed workers for each Social Security beneficiary (143.3 million divided by 55.8 million).

Additionally, as shown in several previous columns (one is here), the so-called Social Security “trust fund” has been wantonly raided for the past 40 years and used to pay for the government’s everyday operations. The “trust fund” contains virtually nothing except $2-plus trillion in IOUs from the rest of the government, which is itself trillions of dollars in debt.

Because of all of this, even the astronomical taxes noted earlier have been less than benefits paid for most of the past year — and it’s going to get worse. The crisis that supposedly didn’t exist in 2005 is here. Thanks, smarties.

The bad news is that is the good news, and that was based mostly on the Trustees’ look at the long-term health of Social Security from last year. Medicare’s unfunded liabilities are much worse – $38.1 trillion (again, as of last year), while Fannie Mae/Freddie Mac, which aren’t even accounted for in the Treasury Department’s 2009 Financial Report, lost $100 billion last year and may end up costing the government between $1 trillion and $5 trillion in losses.

A bonus item from Tom’s tease back at BizzyBlog – that employed/beneficiary ratio dropped from 2.56 (rounded up to 2.6 in the column) at the end of 2008 to 2.39 at the end of January 2010, and is likely to worsen through the end of the year.

February 24, 2010

Last week during his Henderson town hall meeting, Barack Obama floated the idea of getting rid of the cap on the FICA/SECA taxes that go toward Social Security as a way to make it solvent for a bit longer. As Dad29 notes, that would be a significant increase in the marginal tax rate (for those of you in Rio Linda or West Palm Beach, that’s the amount of tax paid on the last dollar made) for those making more than $106,800, which is a lot less than the $250,000 Obama promised would not see a single tax increase, including very-specifically a payroll tax increase. Specifically, it’s a 6.2-point increase for those with an employer (with said employer being dinged that same 6.2 percent), and a 12.4-point increase for the self-employed. Assuming the Bush tax cuts are allowed to expire on schedule, that would make the effective self-employed (i.e. small-business) top federal tax bracket 54.9%, and the employee top federal tax bracket 47.25%.

Item number two, almost thrown away, is an admission that Social Security is now likely to exhaust its combined “Trust Funds” somewhere around 2030, a significant move up from last year’s projection of 2037 (with the OASI fund projected to be exhausted in 2039 as of last year and the DI fund exhausted by the end of this decade). That would match the “high-cost” case from last year’s Trustee Report.

As for Obama’s claim that eliminating the cap would make Social Security solvent long into the future, let’s take a quick look at that. Assuming that it has no effect on on the economy, removing the cap would increase the FICA/SECA tax take by roughly 21%. Some very-back-of-the-envelope number-crunching refreshes my memory of a semi-forgotten study that found that lifting the cap entirely would only delay the inevitable decline and collapse of Social Security by roughly 15 years. Ever-so-conveniently, that would move fund exhaustion barely beyond Obama’s life expectency.

February 22, 2010

I could have also titled this Part 2 – I already reported that between February 2009 and January 2010 (or the first full 12 months of the Obama administration), Social Security posted a 12-month primary deficit in its combined OASDI “Trust Funds”. As part of a look into the numbers, I came across the Social Security appendix to the proposed FY2011 budget prepared by the White House Office of Budget and Management.

I draw your attention to the pair of tables titled “Status of Funds”, one found under the “Federal Old-Age and Survivors Insurance Trust Fund” section (pages 1214-1215 of the document) and the other found under the “Federal Disability Insurance Trust Fund” section (page 1216).

Last month, the Congressional Budget Office estimated the FY2010 Social Security primary deficit to be $28 billion, with the FY2011 primary deficit at $20 billion. The bad news is the OMB now predicts a primary deficit of $33.754 billion on total revenues of $793 billion, total outlays of $708.35 billion, and $118.404 billion of interest.

Given that the administration had planned on taking $21.028 billion from the “Trust Funds” to pay for the rest of government for FY2010, that represents a $54.782 billion unplanned addition to the deficit. At least they’re not counting on Social Security to run in the black for FY2011 – they project a $19.136 billion primary deficit in the combined funds, so the first $19 billion or so in deficits next year will be “accounted for”.

The ugly news is that the OASI “Trust Fund”, which has been running 12-month primary surpluses for all except one 12-month period (due to an unexplained crediting of payments to the DI fund in November 1994) since 1988, is expected to run a $2.934 billion deficit in FY2010 before (hopefully) recovering to a $12.152 billion primary surplus in FY2011. The DI fund began running 12-month primary deficits full-time in October 2005, and transitioned to an overall 12-month deficit in February 2009.

Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing — in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30….

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume….

I did so, and just like in September, I found some rather “curious” claims of economic boom. In fact, the new “boom” is even more unbelievable than the old “boom” (note; the September 2009 CBO GDP estimates come from summer 2009 budget update).

Click for the full-size chart

Between this fiscal year and FY2019, instead of a cumulative Social Security primary deficit of $100 billion, we’ll have a cumulative Social Security primary deficit of $157 billion. That is, of course, if we actually do get all the economic and tax growth that the CBO seems to hope we will. If we don’t, the chart I put together back in September showing just how easy it was to turn the CBO’s hope into red ink as far as the eye can see will be rosy.

That also doesn’t include Obama’s plan for a second round of $250 checks to every Social Security recipient. That is a drag of another $13 billion on this year, which would make this year’s cash deficit somewhere around $51 41 billion.

Revisions/extensions (4:42 pm 2/4/2010) – The internal copy editor failed me, as I made a basic math mistake. Thanks to Hot Air commenter WashJeff for the catch once Ed Morrissey made the news a front page post.

February 2, 2010

Last month, I explored the very-disappointing preliminary Social Security numbers, using the December Monthly Treasury Statement and the investment holdings report from the Social Security Administration. The time-series report for December 2009 from the SSA’s Office of the Chief Actuary is finally available, and the news is even worse.

First, a note; while the other reports included an acceleration of some Social Security payments from January into December, the time-series report does not. That allows an “apples-to-apples” comparison of both monthly and yearly changes.

Also, I still don’t have a satisfactory answer why the various numbers given for the trust fund assets don’t reconcile. I don’t expect to be able to give an explanation until the January time-series numbers are released.

Total income, including $58.514 billion in misleadingly-labeled “interest” was $105.475 billion in December, both within the margin of rounding of my earlier numbers. Total outgo was $58.268 billion, which while higher than the margin of rounding than my earlier estimate is still within the margin of estimation. That makes the December primary (cash) deficit a record $11.307 billion (nearly double the previous modern-day record set in November 2009 and more than double the primary deficit in December 2008), and the 2009 calendar-year primary surplus only $3.338 billion, easily the worst modern-day 12-month performance.

Now, the bad news. Unless January and February revenues increase by at least 2.75% over the revenues received in those months in 2009, Social Security will be running 12-month primary deficits by February. Unfortunately, the total tax take doesn’t exactly suggest that level of short-term turnaround is in the cards. The January 29, 2010 Daily Treasury Report (the last business day in January) has January 2010 total tax revenues at $156 billion, down from January 2009’s $168 billion and January 2008’s $181 billion. While the January 2009 Social Security income was about 2.2% higher than the January 2008 income because the recession affected high-income earners disproportionately, this year’s total tax drop is greater than last year’s.

Projecting forward through the rest of 2010, the situation is even more bleak. It will take an over-4% increase in tax revenue each and every month this year for Social Security to be above the break-even line at the end of the year, and that only knocks the underwater point to sometime in 2011.

The ugly is that does not take into account the $250 “makeup” checks Obama wants to hand out to everybody on Social Security because there was no cost-of-living increase this year. That’s a drain of $13.5 billion, or a bit short of a quarter of the monthly outgo.

January 15, 2010

Earlier this month, I noted that the first set of December numbers for Social Security, the “investment” holdings, commonly called the “Trust Funds”, rose by a very-disappointing $24.153 billion in December. While the December Trust Fund Operations numbers are still not available from the Social Security Office of the Chief Actuary, the December Monthly Treasury Statement from the Department of the Treasury, which forms the basis of those numbers, is available. There is an interesting tidbit on the cover page – “Federal old-age and survivors insurance trust fund and Federal disability insurance trust fund benefit payments for January 3, 2010, were accelerated to December 31, 2009.”

That explanation of what I had hoped to be an anomaly is not entirely satisfying. First, I have to explain how I derived the numbers from the Trust Fund Operation time series – the “total income” and “total outgo” for a given month comes from the “income, outgo and assets” chart, while the “net interest” comes from the “income components” chart. The equivalent numbers on the Monthly Treasury Statement are, respectively, the “receipts” and “outlays” for each fund found in Table 8, and the “Interest Received by Trust Funds” for each fund found in the end of Table 5. While they are not 100% reconciled, the margin of difference is typically well under 1% (keep that statistic in mind).

Including the “accelerated” payments from Social Security, and also including the semi-annual crediting of “interest”, the “total income” was about $105.5 billion (of which about $58.5 billion was “interest”, in line with what was “credited” to the funds in December 2008), and the “total outlays” were about $87.7 billion, which should make the “net increase in assets” about $17.8 billion. Something is massively off, because that does not support the $24.2 billion increase in the “Trust Funds”. However, since I don’t have enough information to say what is off, all I can do until the Office of the Chief Actuary releases its numbers is note it and move on.

The total income estimate, which is 0.443% lower than it was in December 2008, is right in the ballpark of what is expected given the recent year-over-year history of the “Trust Funds”. In 2009, the 11-month average increase had been 0.271%, with the average year-over-year decrease over the prior 5 months being 0.446% and the average year-over-year decrease over the prior 3 months being 0.431%.

Accelerating a significant portion of the January 2010 payments to December 2009, which affects the total outgo of both months, makes apples-to-apples comparisons a bit “problematic”, with the December 2009 monthly change, the January 2010 monthly change, and the 12-month changes featuring only one of those months a challenge to estimate. However, calculating the recent average year-over-year change allows one to estimate what the outgo would have been without the acceleration. The average year-over-year increase in outgo was 9.648% in the first 11 months of 2009, increasing to an average year-over-year increase of 9.939% over the prior 5 months and an average year-over-year increase of 10.529% over the prior 3 months. Given that, my best estimate of the “December-only” version of total outgo is $58.1 billion.

Now it becomes possible to run a preliminary apples-to-apples comparison, with the caveat that at least one of these numbers may well be off. $105.5 billion in income (including “interest”) less $58.1 billion of “December-only” outgo and less $58.5 billion in “interest” leaves a primary “December-only” (or “unaccelerated”) monthly deficit of $11.1 billion, almost double the previous record of $5.9 billion last month. It also makes the “unaccelerated” Calendar Year 2009 primary surplus only about $3.5 billion.

Since I don’t have the usual numbers, I will not go further into analysis at this point. However, don’t be surprised if the panic button is pressed before April.

The 12-month OASDI primary surplus was only $9.598 billion, also the worst 12-month performance since monthly records began.

Since there won’t be an cost-of-living increase in Social Security benefits, the combined funds may yet avoid a 12-month primary deficit in 2010 by the skin of its teeth. However, that is dependent on an improvement in the wage situation, and specifically an improvement in the job prospects of those between 62 and 67 years old. Somehow I don’t see the trend of older and higher-earning workers losing their jobs disproportionately reversing.

If you think that’s bad, the DI (Disability Insurance) portion is even worse. I had not taken a very close look at it before, but perhaps I should have because it has entered the last stage of a fund collapse – cannibalization of principal:

For the 50th straight month, going back to October 2005, the DI Fund ran a 12-month primary deficit, this time hitting a new high of $21.399 billion.

Outside of the “double tax-collection” months of January and April (when it recieves both the quarterly estimated income tax payments, also received in June and September and the quarterly tax on benefits, also received in July and October), the last time the DI Fund posted a monthly primary surplus was September 2007 (which itself is a “tax-collection” month, specifically of the quarterly estimated income tax payments). One would have to go back to March 2007 to find a month outside of a “tax-collection” month with a monthly primary surplus, and all the way back to May 2003 to find a month outside both the “tax-collection” and “tax-season” months (January through April) with a monthly primary surplus.

A similar monthly situation with the overall DI Fund exists – outside of the “double tax-collection” months and the semi-annual interest-crediting months (June and December), the last time it posted an overall monthly surplus was September 2007; and outside of tax or interest “enhancements”, the last overall monthly surplus was posted in July 2003.

All that has led to the DI Fund entering a 12-month overall (which includes the effects of “interest”) deficit beginning in February 2009, which means it is redeeming more US Treasuries than it is buying. That 12-month overall deficit, which has existed since then, has now hit $10.525 billion, the first time it topped the $10 billion mark.

Allow me to repeat that – the DI Fund is now in the final stage of a fund collapse – the exhaustion of principal. In this case, that principal, as of November 30, 2009, was $202.265 billion.

If one thinks that December, and specifically the semi-annual interest crediting that happened last month, is going to be the saving grace, the OACT has bad news. While the detailed December numbers are not available, the investment holdings for December are. I cannot explain why the investment total in that time series is consistently somewhat higher than the time series of trust fund operations linked to above, but it is close enough for government work.

The first item of note is the DI Fund investment balance. It dipped from $202.531 billion in November to $199.760 billion in December. That would be the first overall monthly deficit in December for the DI Fund since 1993, just before a change in the percentage of the payroll/self-employment tax designed to prop up the DI Fund took effect.

The second item is the OASDI Fund investment balance. It rose only $24.153 billion between November and December to $2,518.541 billion, less than half of last year’s November-to-December increase of $52.37 billion and the lowest November-to-December increase since 1997, when the OASDI Fund investment balance was $655.449 billion. I hope for this country’s sake that it’s just an anomaly. If not, then it is almost certain that the combined funds have gone into a 12-month cash deficit mode because the “interest”, which is credited on both the redeemed securities and the ending balance, should be somewhere north of $58 billion.

R&E part 2 (3:04 pm 1/7/2010) – Thanks again for the link, Ed. For those of you not coming here from Hot Air, Ed reposted charts of the last 23 months’ performance of both the OASDI and the DI “Trust” Funds.

For those of you coming here from there, stick around and enjoy the hospitality.

R&E part 3 (9:16 pm 1/15/2010) – I found at least a partial explanation of the December “anomaly” courtesy the Treasury Department – the January 3, 2010 Social Security payments were “acclerated” into 2009. A longer explanation is over here.

December 7, 2009

Ever since Ed Morrissey figured out that Social Security had started to run monthly deficits back in May, I’ve been on it on-and-off. There’s some bad news, and some REALLY bad news over the last couple months:

The FY2009 primary (cash) surplus of the combined funds was $19.356 billion. While that is slightly higher than the summer 2009 Congressional Budget Office estimate thanks to slightly-higher-than-projected revenues, it does not represent any meaningful improvement in the ugly projections for the future. That also was the worst 12-month performance since January 1993-December 1993, and the worst fiscal-year performance since monthly records were kept starting in 1987.

The $4.377 billion primary deficit for September 2009 and the $4.829 billion primary deficit for October 2009 were, excepting the anomalous August 1990 performance, the 4th- and 3rd-worst monthly performance (respectively), trailing only 2nd-worst December 2008 and worst-ever August 2009.

For the third straight month, both halves of the Social Security “trust fund”, the Old-Age Insurance Fund and the Disability Insurance Fund, ran monthly primary deficits. That stretch has never happened before. Moreover, the prior two times that happened were in December 2008 and November 1993.

But wait, it gets worse. That $4.8 billion primary deficit for October made the September 2008-October 2009 12-month primary surplus only $14.902 billion, the worst 12-month performance since monthly records were kept starting in 1987.

Do remember that there is not a single penny set aside in the federal budget to pay cash to either the interest or principal owed to the Social Security “trust fund”.

October marked the 6th straight month of red ink for Social Security, yet another record-bad performance.

Before the CBO’s summer 2009 projection that the fiscal-year cash deficits will begin in 2010, neither the CBO nor the Social Security Trustees had predicted this situation to begin prior to 2012 since 1983.

Since 1987, November has been a negative month 11 of the 22 years, and all 6 years following a negative October.

Chuck also explains why this situation is a bad thing far better than I can:

The rising debt that the Trust Fund holds can perhaps best be understood by conceptualizing it as being like a mortgage owed by the federal government, albeit an unusual kind of mortgage in which no cash payments are made by the borrower (the federal government) until the lender (Social Security) needs money. As long as Social Security’s own incoming tax revenue is sufficient to fund its benefit payments, the government is not required make any payments on the mortgage. When Social Security’s incoming tax revenue falls short, however, the government needs to produce extra cash and start paying that mortgage off. The mortgage debt will continue to grow, however, as long as the interest on the debt is greater than the monthly cash payments being made.

An individual analogy may help to make this clearer. If an individual homeowner took out a mortgage and then paid only $1770 on it over six months, when the mortgage’s interest costs alone over that period were $5930, then at the end of those six months that person would owe a further $4160 on the mortgage despite having made several payments. Paying down just a portion of the interest and none of the principal on a mortgage parallels what is happening here. The money obligated to the Social Security Trust Fund continues to rise as the fund accrues interest; but our cash-strapped government now has to deliver additional money to support benefit payments, and has had to do so for half a year.

Revisions/extensions (12:16 am 1/7/2010) – I don’t know how I missed the various typos confusing “billions” and “trillions”. Sorry about that.